The Argentine bond saga, made simple

Posted Wed, June 11th, 2014 9:13 am by Lyle Denniston

Commentary

It is one of the strangest legal disputes ever to reach the Supreme Court. On one side, a foreign nation is accusing U.S. courts of trying to ruin its economy and weaken its military defense. Its legal opponents answer that the nation is an international scofflaw that won’t obey anything the courts do, anyway.

Adding to the drama is that some high-profile legal talents — Theodore B. Olson, David Boies, and Paul D. Clement — are right in the middle of it. For added measure, billions of dollars are at stake. Add to the mystery the fact that no one has any dependable idea how or when the Supreme Court will react. And add to the intrigue the fact that it all might be settled if the Supreme Court would just hand it off to a state court, to spell out the meaning of a two-word Latin phrase.

This is the Argentine bond saga, and it goes back at least thirteen years, with some history running all the way back to the 1820s. Can this be made simple? Let’s try.

In 2001, Argentina found itself once again in the throes of domestic economic collapse — a scenario that had occurred over and over. This time, it had raised a lot of money by selling bonds but, with hardly a peso to its name, it decided it would not pay back anything.

Some $81 billion of financial paper suddenly was all but worthless. Argentina owed a lot of it to people and institutions outside the country, in the United States and Europe. And, although there have been many rounds of legal jousting in U.S. courts (we’ll tell you in a moment how they got involved), Argentina still has not paid back anything on that specific debt, and it has passed laws barring any repayment. A federal judge’s multiple orders on payback are on hold for the time being.

We said that these bonds were “all but worthless.” Because some investors are more willing than others to take really big risks, many of them bought up some of those “distressed” (that is, defaulted) bonds, hoping that some day, somehow, they would be able to cash in on them, even if only at a rate of a few cents on the dollar. Perhaps strangely, there thus was a market for the bonds, at huge discounts.

The face value that is now specifically in dispute before the Supreme Court is $1.33 billion. That is the amount of bonds in the portfolio of a group of investors led by NML Capital, Ltd., a hedge fund that does well in buying up such assets.

The U.S. courts got involved because, inevitably, there were lawsuits in this country, based on the fact that, beginning in 1994, Argentina had gone to the U.S. to sell those bonds. It had made promises to win over investors who were wary because of that nation’s financial past — a history that one U.S. court would disparage as “a diplomacy of default.”

One promise was that any dispute would have to be settled under New York law. And another was a so-called “equal treatment” guarantee. That second promise goes by a Latin phrase, pari passu. Loosely translated, it means that everybody gets treated the same when it comes to investors’ rights. It is a standard part of almost all international borrowings by governments.

Meanwhile, even as Argentina went on refusing to pay back any of the investors holding the defaulted bonds, it had twice asked those holders to swap those bonds for new ones, and something like three out of every four of those investors had agreed to those deals. It was the holdouts who didn’t, and it was the holdouts who sued in U.S. courts.

One of the legal strategies of the holdouts’ lawyers was to treat their complaint as a simple issue of living up to one’s promises. Argentina, they contended, had promised to treat investors in the 1994 bonds equally with all other overseas investors in Argentine debt, and yet that country was regularly paying back the investors who agreed to the 2005 and 2010 swaps, while paying nothing to the holders of the 1994 paper.

Ultimately, a federal judge in New York City, Thomas P. Griesa (in time, fully supported by a higher court, the U.S. Court of Appeals for the Second Circuit), ruled that if Argentina made any more payments to the swap participants, it had to pay what it owed to the holdouts — that is $1.33 billion. That, Judge Griesa said, is what pari passu means.

Argentina thinks pari passu means something else: only that it would treat the investors in a single borrowing the same, not that it would treat everyone in the world to whom it owed money the same. The holdouts had a chance to make a swap, and they chose not to. What self-respecting government, Argentina asks, would tie its hands on how it goes about managing a series of borrowings?

Argentina’s lawyer, Paul Clement, took that government’s latest case to the Supreme Court. First, he asked the Court to send the dispute to the New York state courts, because the meaning of pari passu as a legal promise is controlled by New York law. If the Justices did do that, and state courts read the promise Argentina’s way, that would be the end of Judge Griesa’s mandate on payback. Argentina clearly is willing to take that risk.

Second, Clement asked the Court to rule that a U.S. law which seeks to provide some legal cover for foreign governments who are sued in U.S. courts denies Judge Griesa the power to decree how Argentina manages its foreign debts. In effect, Argentina claims that the Griesa orders may actually compel it to sell off some of its military equipment or its overseas embassy properties to raise the money, and those assets are surely beyond the judge’s reach.

NML’s lawyer, Theodore Olson, counters that Argentina made a deal to raise money and now, true to a history that goes back many decades, is trying to squirm out of the deal. A promise was a promise, Olson contends, and Argentina can escape the consequences of a deal only by giving up any realistic chance of raising money in the U.S. from here on. With all of the talk, public and private, by Argentine officials that they won’t obey the U.S. courts, that government deserves nothing, Olson has argued.

Siding with Argentina, but with some separate claims for other investors, is David Boies. His investor clients have been barred from the NML case in lower courts, and they want the Supreme Court to let them into it, so they can challenge the sweep of Judge Griesa’s orders. If those orders are carried out, Boies argues, it will force Argentina to default on the bonds obtained by investors in the 2005 and 2010 swaps.

When will the Supreme Court sort out all of this? Tomorrow, the Justices are scheduled to take their first look at this phase of the dispute at their private Conference. But it is anybody’s guess when the Court will act.

If things were not complicated enough over pari passu, the Court is already moving toward a decision in another Argentine bond case; a hearing in that case was held on April 21. In that one, NML and others won damages verdicts totaling about $2.5 billion, and they have asked the Court to force Argentina to tell them where it has its money around the globe. NML and the others want to go after that money in those other countries, to satisfy the legal duty to pay the $2.5 billion.

The Court might hold the pari passu case until it decides that other case, because it is possible that the other case will result in some clarification of U.S. court power to deal with foreign government debt policy.

Or, the Court might ask the Obama administration for its views on pari passu — a request that Argentina surely would welcome, because the U.S. government already had told the lower courts that it thought Judge Griesa got that wrong, and that his rulings would upset the whole scheme of foreign government borrowings.

Or, the Court might grant Argentina’s pari passu plea, and schedule the case for decision at its next Term, starting in October.

Or, it could deny the new case, and that would put Judge Griesa’s orders into effect. And then everybody would watch to see what Argentina did.

Finally, and this would be a vast disappointment all around, the Court might simply take no action at this point on the new case, and leave everybody guessing until at least October.

Upcoming Oral Arguments

3/31Kimble v. Marvel Enterprises, Inc. Whether the Court should overrule Brulotte v. Thys Co., which held that “a patentee’s use of a royalty agreement that projects beyond the expiration date of the patent is unlawful per se”.

4/20Johnson v. United States Whether possession of a short-barreled shotgun is a violent felony, leading to a longer prison term as a career criminal.

4/21McFadden v. United States A federal prosecutor’s duty to prove that a suspect knew that a substance was an illegal substitute for a banned drug.

4/22Horne v. Department of Agriculture The federal government’s duty to pay raisin growers for an order requiring removal of part of a year’s crop from the market to stabilize prices.

On Monday afternoon Justices Anthony Kennedy and Stephen Breyer testified before the House Appropriations Committee. The purpose of the hearing was to discuss the Court’s budget for the next fiscal year and the federal judiciary, but the legislators also took full advantage of the occasion to touch on other topics as well.